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U.S. and China playing chicken on trade

SHANGHAI – As the United States and China exchange increasingly antagonistic trade threats, U.S. business leaders, farm groups and some economists worry that President Trump might be going too far.
Given China’s ambitions to dominate cutting-edge technology, he may have to go much further to get Beijing to back down.

At the heart of the dispute is a fundamental question: Which country is more willing to endure short-term pain on trade for the long-term gain of playing a leading role in industries like robotics, aerospace, pharmaceuticals, electric cars, artificial intelligence and more.

China has embarked on an aggressive and expensive plan to retool its economy for the future. Trump has said that China’s approach relies on unfair and predatory practices, and on stolen U.S. technology. Even as Chinese leaders say they want to avoid a trade war, they are staunchly defending their plans for high-tech sectors, and showing little sign of changing their ways.

Trump’s threat to sharply escalate the administration’s tariffs on Chinese imports – a threat he reiterated Friday – shows that neither side has yet gone far enough to persuade the other to compromise. Bigger and broader tariffs may be necessary to get China’s attention.

“The administration, if it’s serious, better be prepared for much more,” said Derek Scissors, resident scholar at the American Enterprise Institute.

China’s $300 billion plan for government assistance, Made in China 2025, calls for helping cutting-edge industries by providing low-interest loans from state-controlled banks, guaranteeing large market shares in China and offering extensive research subsidies. The goal is to help Chinese firms acquire Western competitors, develop advanced technology and construct immense factories with considerable economies of scale.

It is an agenda that China would probably go to great lengths to protect. “We will not start a war – however, if someone starts a war, we will definitely fight back,” Gao Feng, the commerce ministry spokesman, said at a news conference in Beijing on Friday. “No options will be ruled out.”

For the United States, victory in such a war would be difficult to verify, much less achieve.
China could say it plans to ease back on government support. But that could be difficult to quantify because of the country’s opaque political system and the state’s control of information.

China could back off from rules that favor local competitors and require U.S. companies to share technology if they want access to the Chinese market. For example, foreign automakers face pressure to transfer electric-car technology to their local partners, and foreign technology companies are increasingly required to submit to security reviews. Foreign businesses have long complained that many of the rules they must follow are unwritten.

China’s government-financed campaign is already paying off in some ways. Drive into downtown Shanghai from Pudong International Airport and you pass a seemingly endless series of huge hangars and vast, glass-walled design centers, all part of the country’s effort to create a commercial aircraft manufacturing giant to rival Boeing or Airbus. Travel to factory districts in Shanghai and on the outskirts of many other Chinese cities and you see enormous, newly built factories ready to churn out electric cars, the batteries they use and other components.

Proving that the Chinese government unfairly supports the effort could be difficult, however.

The United States could press its argument with the World Trade Organization, which oversees global trading rules and prohibits big loans from government-controlled banks at artificially low interest rates. But the WTO requires many contracts and government documents to prove cases, evidence that can be hard to get in a tightly controlled country like China.

Even when the WTO rules against China, persuading the country to comply can be challenging. One such ruling, involving China’s restrictions on foreign electronic payment systems, was issued nearly six years ago. China is still mulling how it will comply – despite numerous complaints from the Obama administration and more recent nudges from the Trump administration.

So the United States has turned to tariffs. That means it is using a 1980s tool to address an industrial policy issue that is already shaping the 21st century.

Chinese officials dispute the U.S. accusations about their unfair trade practices. They say Trump’s tariffs violate WTO rules, and they dispute claims that China forces U.S. companies to hand over technology. As for Made in China 2025, Chinese officials say the plan is only guidance, not a government directive – and that foreign companies are free to participate, too.

In China’s current industrial policy, the Trump administration sees an extension of how the country has already come to dominate one major industry of the future: solar power.

Trump himself is no fan of solar panels. He has spoken enthusiastically about coal, not renewable energy, throughout his campaign and his presidency. But the solar power industry is one of the biggest success stories so far in China’s efforts involving advanced industries.

The United States played a central role in developing solar panels and manufacturing them until a decade ago. Around then, the Chinese government decided to finance a lavish expansion of the sector. State-controlled banks lent tens of billions of dollars at low interest rates despite the high-profile bankruptcies of solar manufacturers.